The stock market’s recession/inflation concern pendulum swung back towards recession last week as investors focused on what a recession may look like and how a benign one actually might not prove to be too bad.
One narrative doing the rounds last week was that if the oil price continued to come down (and maybe bring inflation down with it), the US economy might still enter a recession, but it could be a mild and short one which would give the Fed more room to respond in a more supportive manner, i.e., not having to raise rates quite as far or as fast.
This thinking was evident in the bond market's behavior as the 10 year Treasury interest rate drifted lower earlier in the week, before rebounding on Thursday and Friday.
The idea of this silver lining boosted stock prices in advance of Friday’s employment report with a generally quiet newswire and very little in the way of earnings or economic reports. Particularly perky were the more “risk-on”, beaten-down corners of the market, including from the wreckage that is profitless tech as well as internet and consumer discretionary stocks.
The release of the minutes of the Fed's June policy meeting did nothing to shake the suggestion that the interest rate hike at the next meeting later this month will be another 0.75% like it was in June. They revealed that the participants recognized the possibility that “an even more restrictive stance on interest rate policy could be appropriate if inflation remains high” and that“inflation pressures have yet to show signs of abating”. Although it should be said that the market seems to have baked this kind of hike into prices already.
The weekly jobless claims figures showed unemployment is on the rise, which is important data for consideration by the Fed as it has always said it will keep raising interest rates until the labor supply-and-demand picture comes back into balance at which point it can slow, stop or even maybe reverse its interest rate hiking policy. These numbers inch the Fed a little further toward that goal.
On Friday, the Labor Department released its monthly employment report (see FINANCIAL TERM OF THE WEEK below) for June showing that US employers added more jobs last month than economists had expected. Payrolls rose by 372,000 in June, fewer than May's revised gain of 384,000 jobs, but more than the expectation of 250,000. That’s still 524,000 fewer jobs in the economy than there were in February 2020, right before the COVID downturn hit. The unemployment rate held steady at 3.6%, in line with estimates.
The market’s takeaway from all that data was that while it did somewhat soothe fears of an imminent recession, it did little to relieve fears of considerable further Fed interest rate tightening. It did also contain a small nugget that suggested inflation may be peaking as average hourly earnings only rose 0.3% last month, up 5.1% from a year ago.
After the release of the report, investors seemed a little unsure as to how to respond and the indexes bounced around aimlessly all day but generally drifted a little higher to cap quite a successful week, particularly for the NASDAQ. Having said that, volumes were once again low and the somewhat unconvincing and rather directionless nature of the index price movements last week leaves us even more reliant than usual on the Under The Hood analysis (see below) for clues as to what is really going on.
Faced with the backfiring of what was always just an obvious and not-very-clever PR stunt and having to pay a bloated $44 billion for an item currently worth a mere $28 billion, stock market genius Elon Musk is floundering around desperately looking for excuses to back out of his proposed Twitter purchase, including promoting the ridiculous notion that he didn’t realize how badly Twitter is infested by bots and fake accounts. But he might just have signed a couple of forms that he perhaps shouldn’t have, which may mean that he can’t just walk away from the deal. Ooops. Bummer.
Other News: Worldwide Edition
Japanese assassination .. Sadly, the former Prime Minister of Japan, Shinzo Abe, died after being shot twice in the back during a successful assassination attempt at a campaign stop. It has shocked the country, not least because Japan experiences almost no gun violence. He stood down as PM in September 2020 but was still highly influential in government, with the current economic policies of monetary easing, fiscal stimulus and structural reform being known as “Abenomics”.
Bye Bye Boris .. Following months of revelations about banging parties during lockdown, sleaze and sexual assault, jobs for the boys (and certain selected younger girls), jaw-dropping incompetence, endless lies and bungled cover-ups, Boris Johnson was finally forced on Thursday by his own Conservative party (along with the mass co-ordinated resignations of over fifty government ministers) to announce his resignation as the UK’s Prime Minister and gave a petulant, self-pitying and widely-derided resignation speech in front of Number 10 Downing Street.
It seems likely, however, that he will astonishingly remain in the role of top dog until his party has selected a new leader who will become the next PM, a process that could potentially not be completed until September or even early October.
This raises concerns about the shorter term outlook for a country still being run by an angry, unpredictable, self-absorbed lame duck for maybe many weeks, by a man continuing in office having been dumped precisely because he is so clearly unfit for that office, at a time that the country is on the brink of a recession and a cost of living crisis, is living through nationwide strike actions and is enduring some of the more challenging consequences of the Brexit decision.
For the many people over here who are understandably bemused by just what the f**k is going on over there and what happens next in a parliamentary system rather than the presidential one, the BBC published a handy guide.
Home invasion .. Another leader toppled last week was Sri Lanka’s Gotabaya Rajapaksa, who was forced to agree to resign on Saturday after thousands of protesters stormed his official residence and marched in the streets of the capital, Colombo.
Concerns at the IMF and BoE .. The International Monetary Fund (IMF) Managing Director said last week the global growth outlook has weakened significantly since July and she could not rule out a worldwide recession. Not directly related to the political chaos in the country, the Bank of England (BoE) last week issued a pretty apocalyptic report about the global economy and its prospects.
More Euro spending? .. French Finance Minister Bruno LeMaire said the European Union must reconsider its debt rules, allowing for more fiscal spending. At the same time the German government, which had just reported its first trade deficit since Bryan Adams informed us that everything he does, he does for you in 1991, was debating a restart of coal-fired power plants to reduce reliance on natural gas before winter demand kicks in. It is hoped that this would support regional economic growth in addition to dampening inflation.
Under The Hood:
Three weeks after the observation of some of the most oversold conditions of the current decline, buyers are demonstrating very little urgency. From the June 16 low in the S&P 500 through to last Friday’s close, the Net Spread between Lowry’s Buying Power and Selling Pressure has barely moved, hardly a demonstration of the typically robust and swift advance in Demand and rapid retreat in Supply evident after lasting market bottoms in the past. These turnarounds have historically been met by an unmistakable and crushing wave of indiscriminate Demand (“buy everything!!!!”), and this absence implies that prices have not yet gotten low enough to get everyone onto “Team Buy”.
Other important data points like the Percent Of Stocks Above 10- and 30-Week Moving Averages and Percent of Stocks 20% Or More Below Their One Year Highs indicate a very weak foundation to the current rally, so far not even matching their levels during previous rally attempts in May and June, which all failed after quickly fizzling out.
Given all this, there is definitely a high risk that (once again!) what we are seeing is little more than a reflex reaction to an oversold condition rather than the beginning of a meaningful and sustained transition back to a bull market for stocks.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
The upcoming week’s calendar ..
Aaaaaand .. it’s back! Earnings season is here for Q2 2022. More than a dozen S&P 500 firms report this week, including JPMorgan Chase, Morgan Stanley, Citigroup, Wells Fargo, PepsiCo, Delta Air Lines, Delta Air Lines and Taiwan Semiconductor.
The monster highlight of the week is the release of both the critical June inflation readings: the retail Consumer Price Index (CPI) on Wednesday and the wholesale Producer Price Index (PPI) on Thursday. Consensus expectations are for spikes of 8.7% and 10.7%, respectively - both pretty much unchanged from the May readings.
Other indicators out next week will include the Small Business Optimism Index and the increasingly-closely-watched University of Michigan's Consumer Sentiment Index.
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US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 19% (down from 23% the previous week)
→Neutral: 28% (down from 30% the previous week)
↓Bearish: 53% (up from 47% the previous week)
Net Bull/Bear spread .. ↓Bearish by 34 (Bearish by 24 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
- Last week’s best performing US sector: Consumer Discretionary (two biggest holdings: Amazon, Tesla) for the second week in a row - up 6.5%
- Last week’s worst performing US sector: Energy (two biggest holdings: Exxon Mobil, Chevron) for the second week in a row - down 1.6%
- The NASDAQ-100 meaningfully outperformed the S&P 500
- US Markets way outperformed International Developed Markets and Emerging Markets
- Large Cap did a little better than Mid or Small
- Growth strongly outperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 158 and rose by 2 points last week while that of US Market Selling Pressure is at 208 and fell by 4 points over the course of the week
- SPY, the S&P 500 ETF is still below both its 50-day moving average and its 90-day and also remains well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 51**. SPY ended the week 18.7% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is still below both its 50-day moving average and its 90-day and also remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 53**. QQQ ended the week 26.9% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week lower at 24.6 and is a little below both its 50-day and 90-day moving averages. It continues to hold above its long term trend line.
ARTICLE OF THE WEEK:
This week .. Congratulations, you’re living through what will go down in history as an astonishing, chart-breaking period of stock market history. What lessons can be learned from 2020-2022?
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
The U.S. Bureau of Labor Statistics (BLS) releases the Employment Situation Summary, better known as the employment, or jobs report, at 8:30 am ET on the first Friday of every month. The report is based on surveys of households and employers. It estimates the number of people on payrolls in the U.S. economy, the average number of hours they worked weekly, and their average hourly earnings, along with several versions of the unemployment rate.
The jobs report is among the most important and comprehensive economic releases, and the earliest to provide data for the immediately prior month. Its numbers are hotly anticipated and closely parsed as a result.
Many investment firms issue estimates ahead of the report for the monthly change in non-farm payrolls and the U-3 unemployment rate, as well as hours worked and hourly earnings. The report often moves financial markets and is used among other data by the Federal Reserve to assess the state of the economy in setting monetary policy.
The establishment survey, formally called the Current Employment Statistics Survey, gathers data from approximately 145,000 non-farm businesses and government agencies for some 697,000 work sites and about one-third of all payroll workers. The survey is based on the weekly pay period that includes the 12th day of the month.
Anyone on the payroll of a surveyed business during that reference week, including part-time workers and those on paid leave, is included in the count used to produce an estimate of total US non-farm payrolls.
Farm workers are not included because of agriculture's seasonal nature; the sector's reliance on self-employment, unpaid family work, and undocumented workers; and its partial exemption from unemployment insurance requirements, since those records are used to compile the survey sample. The payroll data also does not include self-employed workers.
The household survey is based on monthly interviews of 60,000 households conducted for the BLS by the U.S. Census Bureau. Survey participants are asked about their employment status during the week including the 12th day of the month.2
The most prominent product of the household survey is the official, or U-3, unemployment rate, calculated as a percentage of the unemployed actively seeking work relative to the labor force, or the sum of the employed and the unemployed. To be officially counted as unemployed, the survey respondent has to have been available for work in the reference week and made specific efforts to find work during the four prior weeks, unless awaiting an expected recall from a layoff.
A single month of job gains or losses is hardly a trend, and the monthly change in non-farm payroll numbers is subject to wide fluctuations as well as sizable revisions. Still, it can be an invaluable gauge of economic trends in context with the reports from prior months and other economic data.
Employment is so integral to the U.S. economy that there is no single better proxy for its state, and the monthly jobs report is the most comprehensive employment gauge as well as one of the timeliest monthly economic indicators.
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